The Bull Market Turns Two

Two years ago last Saturday, a broad, sustained rise in global stock markets, otherwise known as a bull market, was born—though no one knew it at the time based on the financial market coverage we follow.^[i]

Whilst this global bull market’s second birthday is mostly a trivial milestone with little actual meaning for long-term investors, in our opinion, looking back at the past two years is a beneficial, timeless lesson in how markets work. Let us take a trip down memory lane.

Now, bull market dating can be difficult to determine since currency swings can affect whether a given country experienced a bear market (a broad-based, usually lasting, fundamentally driven decline in equity markets exceeding -20%) in its home currency. A bull market’s beginning is a bear market end. In 2022, global equity returns in Sterling never crossed that -20% threshold—the deepest drawdown was from 8 December 2021 – 16 June 2022 (-15.3%).^[ii] But returns denominated in US dollars did breach this threshold, and the same holds true when returns are denominated in each company’s home currency.^[iii] Therefore, we have found commentators globally now pin a bull market’s beginning to that 12 October.

2022 was a challenging year for investors, based on our observations. A downturn began on 4 January as myriad events widely perceived as negative took turns leading headlines.^[iv] Elevated inflation (economywide price increases). The US Federal Reserve and other monetary policy institutions’ rate hikes. Russia’s invasion of Ukraine. Europe’s energy crisis (and concerns soaring costs and potential rationing would drive deep recession [an extended economic contraction] in Western Europe). US midterm election uncertainties.

Amidst the many fears, global markets slipped -0.4% in USD on 12 October, leaving the MSCI World down -26.1% in dollars from 4 January.^[v] The next day, the US-‘s Bureau of Labor Statistics released its September Consumer Price Index (CPI, a government-produced measure of prices nationwide) report for America, which showed that whilst headline CPI inflation eased to 8.2% y/y from August’s 8.3%, the core rate (which excludes food and energy) accelerated to 6.6% y/y, a new multidecade high.^[vi] Despite opening in the red on Wednesday 13 October, global stocks rebounded and finished that Wednesday up 1.9% in dollars.^[vii]

Huzzah, there it was. Naturally, at the time, we didn’t see anyone cheer a new bull market’s birthday. Investors remained fixated on inflation, based on our coverage of financial headlines, and many observers warned September’s numbers indicated stubborn price pressures—and a possible inflation reacceleration. We read many arguments advocating for the Federal Reserve to hike rates further to get prices under control, and these monetary tightening and higher for longer rates, according to the conventional wisdom we observed, would sink stocks further.

Outside US inflation, we found that financial headlines were preoccupied with the political crisis here over then-Prime Minister Liz Truss’s mini-budget. The spate of modest tax cuts, a reversal of planned tax hikes and energy price assistance sparked a sentiment-driven UK Gilt selloff that triggered a crisis at leveraged pension funds, drawing Bank of England (BoE) assistance. By the time the bull market was born, Truss was clinging to her agenda even as her government collapsed, which we found drove political and fiscal uncertainty. Debt crisis warnings hadn’t abated, and we observed many grim economic projections.

Meanwhile, economic and market projections for the following year were quite pessimistic, based on our analysis. We saw most economists argue a US recession was all-but inevitable in 2023, with the only questions about the downturn’s magnitude and start date.^[viii] On the investment front, a Bloomberg aggregate of 2023 Wall Street strategists’ market outlooks predicted a decline in the S&P 500—the first time the aggregate forecast was negative in decades.^[ix]

Even now, we see some disbelief in this bull market, as evidenced by claims we have seen that the market upturn is due to Artificial Intelligence (AI)—as if Tech and Tech-related things are the only factors driving it and the only beneficiaries. But our research shows the rally is real and broad, and it formed and grew as reality exceeded expectations, driving stocks up the proverbial wall of worry.

See America’s inflation’s downward trajectory over the past two years—a trend mirrored in other developed economies.^[x] Prices never ended up reaccelerating to surpass June 2022’s high.

Exhibit 1: US Inflation’s Downward Trajectory

Source: FactSet, as of 14/10/2024.

That UK political drama cost Truss the premiership, but the UK didn’t have a financial crisis, pensions pulled through and the BoE didn’t need to keep the industry on life support. Gilt yields gradually eased in sympathy with global bond markets.^[xi]

Europe’s energy situation also wasn’t as dire as forecast. In 2022, the baseline expectation was for wintertime blackouts since Western European nations were cutting off ties with Russian producers based on analyses we read. The price cap on Russian oil, widely expected to whack global supply, was coalescing. Whilst the Continent felt some economic pain—especially in Germany—European nations escaped the worst-case scenarios by finding other energy sources. As for the oil price cap, Russia’s shadow fleet of oil tankers have evaded sanctions and sold oil to countries that didn’t comply with Western sanctions—a reminder that no one variable controls global supply and demand. 

As for that highly anticipated US recession, it never came. There were pockets of weakness, mostly in manufacturing and goods industries, as businesses retrenched in advance of an expected downturn. Companies worked off some excesses and got lean and mean in preparation for widely expected tough times—and that anticipation ended up mitigating much of a recession’s purpose. Firms are now going on offense, contributing to growth. Similarly, the UK’s shallow Gross Domestic Product (GDP) contraction in late 2023 was much milder than the gruelling recession the Bank of England had projected.^[xii]

Now, to be clear, we aren’t saying all is stellar or global economic conditions are robust. There are soft patches (like Germany). But as legendary investor Sir John Templeton put it, “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” Amidst that prevalent pessimism two years ago, this bull market began. Stocks didn’t wait for an all-clear signal or the data to even start showing improvement. But they looked out to the next 3 – 30 months and recognised the probable reality wasn’t as poor as many believed. This is a reminder: Waiting for perfection—or even good news—can be very, very costly for investors.